These big numbers are difficult

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  By Russell Bruce

Scottish Labour leader Johann Lamont has been having a little problem getting to grips with official statistics as displayed at First Minster’s Questions last week.

If you are going to make assertions about figures in official statistics it is a requirement to have some understanding of what the numbers mean rather than picking up on the work of a junior Labour Party researcher who has looked up the first table in the 2011/12 Government and Expenditure and Revenue Scotland report (GERS) and plucked out a couple of numbers.

I don’t expect Ms Lamont is interested, but perhaps some explanation of the comparative positions of fiscal management as it relates to the Scottish and UK economies might be helpful.

The GERS figures bring together total estimates of revenue and expenditure, from which Scotland benefits. Scotland receives a block grant from the UK. Tax revenues collected in Scotland by the Scottish Government are a very small percentage – around 7% to which Council Tax raised by local authorities is added.

The total revenue attributed to Scotland is £56.9 billion equivalent to 9.9% of all UK public sector revenue.

Total public sector expenditure for the benefit of Scotland was £64.5 billion in 2011/12. This includes spending by the Scottish and UK governments and a per capita share of UK debt interest payments. Expenditure that is equivalent to 9.3% of total UK public sector expenditure.

Westminster expenditure allocated to Scotland is based on Westminster priorities and decisions. The Scottish Government has no power or influence over how Westminster decides UK expenditure.  In recent years, as we crawl our way out of a global recession, most western governments have run an annual fiscal deficit.

Westminster did not give us this money as Lamont suggested. They gave us a share of the fiscal deficit they have run up on UK current spending allocated to Scotland and a population share of the cost of servicing UK national debt.

Scotland’s share of the debt has a lower impact on fiscal balances than is the case for the UK. 9.9% of UK revenues minus 9.3% of UK expenditure means Scotland is in a relatively stronger position.

Had Scotland been independent in 2011/12 it would have been able to make different decisions on how expenditure in excess of revenue were made e.g. more capital projects to create employment and bring in tax revenues rather than cuts pushing up unemployment and increasing the benefits bill that Osborne is supposed to be so worried about.

Labour seems to find it difficult to get its head round the concept that if you control all your own spending and revenue then you are responsible for the outcome. If you only control a part of the spending with very limited responsibility for raising your own revenues then you cannot control the costs allocated from outside. No money changed hands, just mis-spending by a Tory led Government with costs and debt dumped on Scotland.

The commentary on Newsnight Scotland last week by Dr Angus Armstrong of NIESR, when asked for his assessment of the implication of debt allocation following independence, was illuminating.

Currently UK debt is standing at 88.7% of GDP, up from the period covered by the 2011/12 GERS report when the UK debt to GDP ratio stood at 84.3%. Dr Armstrong said that Scotland’s debt to GDP ratio was around 75%, but if Scotland became independent this lower debt to GDP ratio would no longer benefit the UK economy and UK debt as a percentage of GDP would rise to 104%.

Awareness of the weakness of the UK fiscal position is causing jitters in international markets. If Scotland leaves the UK, the question being raised is -Would rUK be able to pay down its accumulated debt and continue to reduce the annual budget deficit? National debt is growing because the UK is still spending more than it is raising in taxation.

The figures that matter are the ones Alex Salmond quoted. Scotland contributes 9.9% of tax revenues, and expenditure amounts to 9.3% leaving a surplus of 0.6%. Westminster controls 93% of the tax revenues generated by Scotland, (excluding Council Tax and Business Rates) and a sizable chunk of the expenditure allocated to Scotland.

The 9.9% of UK revenue attributable to Scotland shows that a country with a population that is 8.3% of the UK population has an economy that hits above its weight in the amount of tax revenue contributed to the London Treasury.

Were this not the case, the current budget deficit for 2011/12 would have been higher for Scotland. Like many western economies total expenditure was higher than revenue. The difference is -£7,580m.

Labour chancellors have done more than their fair share of borrowing over the years. It is good practice for governments to borrow in the years when the economy is struggling and tax revenues fall then start to pay down that debt when the economy picks up and tax revenues rise.

Although public spending is a bit higher per capita in Scotland it remains affordable despite geographical complexity and having one of the lowest population densities in Europe.

Current budget balance: Scotland and UK 2011/12

Scotland’s current budget balance was minus £3,398 million and the UK’s was minus £92,297 million. To relate this to a percentage share of GDP the impact on Scotland’s GDP was -2.3% and -6.0% for the UK.

Net Fiscal Balance: Scotland and UK 2011/12

These tables add in capital expenditure, treated differently in these statistics as they provide longer-term benefit and have other economic impacts and a positive impact on GDP. Net Fiscal Balance also includes Scotland’s population share of UK debt interest amounting to -£4072 million.

Net Fiscal Balance was -£7586 million for Scotland and -£120,963 million for the UK.  Again we can relate this to GDP and express these balances as a percentage of GDP. For Scotland this is -5% and for the UK -7.9%.

The revenue figures for Scotland I have quoted from GERS include a geographical share of North Sea revenue. The UK figures include 100% of North Sea revenue, as it is the Treasury that received this income in 2011/12.

As it is obvious that rUK will lose around 90% of these revenues post Scottish independence, the shortage on UK Current Budget and Net Fiscal balances would be understated were such comparisons made with an independent Scotland.

Some international comparisons are relevant. Taking Dr Armstrong’s calculation of Scotland’s debt to GDP as 75%, we can compare that to other European countries in 20011/12. Germany’s debt to GDP ratio was 80%, France’s 85.5% and as mentioned the UK was 84.3%. If we look at countries comparable to Scotland in size they had lower ratios e.g. Denmark (46.4%).

As Scotland is part of a larger economy at present, comparisons with France and Germany are relevant. Germany’s high ratio is not a concern whilst that of the UK and France is to both markets and ratings agencies.

As Scotland has no control over Westminster spending allocated to Scotland or has been responsible for the current high level of debt I am sure Ms. Lamont can now see that this arrangement is not working for Scotland.

Scotland is carrying a disproportionate share of the cost of the UK

Should this help Ms Lamont to see the merits of Independence I can offer her some advice. All she has to do is announce that she thought of the idea first, but she did not want to bang on about the merits of independence until she knew which way the wind was blowing and that the money figures stacked up.